A $1000 “no confidence” vote

March 16th, 2008

“A soaring gold price is a vote of ‘no confidence’ in the central bank and the dollar. This certainly was the case in 1979 and 1980. Today, gold prices reflect a growing restlessness with the increasing money supply, our budgetary and trade deficits, our unfunded liabilities, and the inability of Congress and the administration to rein in runaway spending,” wrote Congressman and Republican presidential candidate Ron Paul in a commentary published on lewrockwell.com titled What the Price of Gold Is Telling Us.

Ron Paul’s piece is enlightening and provides evidence that he is the only presidential candidate who understands the relationship of money, banking, deficit spending and the dire circumstances in which America finds itself. The time spent reading Paul’s piece is time well spent.

Ron Paul’s piece is a general and accurate condemnation of central banking and paper money. However, I suspect that gold topping $1,000 last week was not the result of the people’s sudden recognition of the evils of central banking and paper money but more specifically concerns about the stability of the nation’s financial structure. The Fed’s bailout of Bear Stearns, Wall Street fifth largest investment banking firm, became front page news last week.

The Arizona Republic, Arizona’s largest newspaper, made the Fed’s bailout of Bear Stearns its lead front page article Saturday with this headline: “Fed aids bank to quell panic.” Can you believe that, a major newspaper reporting a bank panic? Perhaps that’s why gold topped $1,000 and silver $20.

In a related article in The Republic’s Business Section titled “JPMorgan, Fed move to salvage key bank,” a professor from the Graduate School of Business at the University of Chicago was quoted as saying “My guess is by next week, there will be rumors of other large, familiar institutions” that might be in financial trouble. If so, gold’s run is not over at $1,000.

It’s one thing for the Fed to bail out a bank that most Americans never heard of, but something entirely different if rumors of insolvency spread about more widely known banks. If that happens, this move in gold and silver is not over. However, if people come to accept that the Fed can and will solve all financial problems, then we may see a break in the precious metals prices run up.

Still, there this to consider, which is discussed in The Arizona Republic article: Tuesday the Fed may lower its discount rate a half-point, which would signal to the rest of the world that the Fed is less concerned with the strength of the dollar than it is with the efficacy of the country’s financial system. According to the article, lowering interest rates would put downward pressure on the dollar. A falling dollar, would, of course, mean further increases in precious metals prices.

However, there is always the possibility that gold’s recent run-up and dollar’s decline were caused more by concerns about the U.S. banking system than by concerns about the dollar itself. If so, then $1,000 gold may have already discounted the Fed lowering its discount rate one half-point. And, if there is the perception that a banking crisis has been averted, precious metals prices’ climb—and the dollar’s decline—could take breaks. Only time will tell. Regardless, this should be an interesting week for the precious metals.

Years from now, when we look back at the dollar’s demise, will the Fed’s bailout of Bear Stearns may turn out to be one of the smaller problems faced by the Fed, or will it be pivotal? These are truly times to be invested in gold and silver.

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